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  • Directors & Officers Liability Insurance Market Update

    INSIGHTS MAY 2018

  • ii | Directors & Officers Liability Insurance Market Update

  • Directors & Officers Liability Insurance Market Update | 1

    Insurers seek to mitigate exposures amid rising claims activity The insurance market in Australia for professional indemnity,

    directors and officers liability and financial institutions is more

    challenging than it has been in the past decade. Driven by

    an abundance of claims, the number of claims and reported

    circumstances are exceeding the total insurance market

    premium pool by a significant margin. Some leading insurers

    have struggled to adjust to the current market and economic

    conditions and are either seeking to mitigate their exposure via

    reduced capacity or elevating their attachment points. In some

    cases, insurers are electing to exit market segments altogether.

    Notably, buyers that operate in sectors now deemed medium or

    high hazard are facing insurers exerting significant pressure for

    higher deductibles and premiums to be applied on both renewal

    and new business.

    MARKET CAPACITY AND APPETITE

    Insurance capacity continues to be generally available for all the

    relevant D&O sectors, but for a price. Insurers are declining to

    renew programs where they cannot achieve their required premium

    increases, and product line underwriters are under intense scrutiny

    from management to be unyielding on pricing improvement.

    Insurance placement has therefore become challenging, in

    particular for clients purchasing cover for Security Entity claims

    (shareholder class action). There is now very limited insurer

    appetite for Security Entity Cover (Side C) insurance locally or

    in international markets for Australian risks attaching under

    $100M. Currently premiums above $100m attachment remain

    stable but with major global insurers now looking more closely

    at their cost of capital, change may be on the way. Conversely,

    insurance premiums below $100m are rising substantially albeit

    not to levels forecast by insurers and actuaries.

    Number of securities class action claims in AustraliaFIGURE

    1

    Source: Marsh data

    1999 – 2006 2007 – 2011 2012 – 2016 2017 2018 (pending)

    2 per annum (average)

    20

    15

    10

    5

    0

    4 per annum (average)

    6 per annum (average)

    10 per annum

    16 per annum

  • 2 | Directors & Officers Liability Insurance Market Update

    IMPROVING D&O RISK PROFILE

    Whilst many of the current risk drivers affecting premiums are not

    within control of buyers, there are factors to focus on that may provide

    an improvement in the premium offered by insurers.

    The following items may positively influence Insurers’ perception

    on risk, potentially offsetting the impact of the general drive to

    increase the premium pool size to manage risk and class volatility:

    • Business complexity and transparency of the company’s financial condition

    • Internal company controls and review (and subsequent disclosure implementation)

    • Director quality and board independence

    • Market capitalisation

    • Company culture

    MANAGEMENT LIABILITY

    Despite the significant, year-long pricing correction from the

    existing market leaders, management liability portfolios are only

    just beginning to stabilise with loss ratios expected to break

    even some time in the second half of 2018. Local insurers have

    expressed the view that the pricing correction has not been

    sufficient to attract their participation, and thus competition,

    against the existing market leaders.

    FINANCIAL INSTITUTIONS

    Financial institution insurers are also experiencing similar tough

    insurance conditions as evident in the PI and D&O market. The

    frequency of current claims and increased costs of defending

    regulatory investigations, such as the current Royal Commission,

    are dwarfing the current FI insurance premium pool estimated at

    $250m. Many insurers claim to having not made a profit in the FI

    space for over 10 years.

    1. How did we get here? The history and development of securities; Show me the money! The impact of securities class actions on the Australian D&O liability insurance market, XL Catlin and Wotton & Kearney, 2018

    In their recent white papers1, XL Catlin and Wotton & Kearney

    have sought to set the tone of the conversation for some of

    the factors affecting listed companies and security entity

    claims in Australia.

    There is a strong view amongst insurers that the market is

    dramatically under-priced and that premiums need to increase

    in multiples to return the market to profitability. Actuarial firm

    Finity Consulting’s recent “Show me the numbers” assessment

    at the National APIG Conference in September 2017,

    suggested that the local D&O insurance market remains 100%

    under-priced but 250% under-priced on ASX listed programs,

    in particular those with Security Entity Cover (Side C).

    While class action claims are driving a specific response due

    to their severity in a relatively small Australian D&O premium

    pool, the frequency of such claims, albeit increasing, remain

    significantly below what is experienced in the US and some

    European countries.

    To some degree, the D&O policy is now acting as a de facto

    “corporate guarantee” and, with this trend, the relatively

    modest local premium pool must become larger or be

    diversified into global markets - with premium rates reflecting

    US and European risks - if the market is to remain functional.

    Recent court decisions continue to demonstrate that

    Australian companies are subject to a strong regulatory

    environment, which in turn encourages local and

    international investment in Australian companies. As the

    claims experience resulting from these more stringent

    standards comes into alignment with regimes abroad, it is

    now apparent that D&O premiums in Australia are beginning

    to reflect closer to prices charged in the US and some

    European jurisdictions.

    IMPACT OF CLASS ACTION CLAIMS

  • Directors & Officers Liability Insurance Market Update | 3

    2. Optima Lite 2017

    Looking ahead The market looks set to continue seeking price increases through the rest of 2018, even

    if the class action activity proves to have peaked. Indeed, in their most recent market

    assessment , Finity Consulting suggests that even after the most recent round of

    increases, another 35% - 55% would be required to stabilise the local D&O market.2

    Given so many past and current class actions centre on the company’s attitude towards

    risks and continuous disclosure, it is only logical that insurers are seeking to better

    understand both the Board and management’s practices in this regard. Specifically,

    insurers are keen to understand the framework for disclosing risk, including timing to

    provide revise guidance back to the ASX for key metrics.

    Insurers are also showing greater interest in a company’s remuneration guidelines

    for short and long term incentives, and whether there have been changes over the

    preceding years.

    As the cost of Security Entity Cover (Side C) increases and availability becomes tighter,

    many buyers will be carefully re-evaluating their company’s decision to continue to

    purchase this cover. This may reignite the age-old debate of needing to balance the

    company interest against that of directors and officers.

    For many, the insurance program still represents significant value, with some programs

    still more affordable now despite the current claims environment, than five years ago,

    when coverage also had lower limits.

    We expect insurers to continue recalibrating upwards in both pricing and deductibles

    while claims activity will be more closely scrutinised.

  • About Marsh: A global leader in insurance broking and innovative risk management solutions, Marsh’s 30,000 colleagues advise individual and commercial clients of all sizes in over 130 countries. Marsh is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), the leading global professional services firm in the areas of risk, strategy and people. With annual revenue over US$14 billion and nearly 65,000 colleagues worldwide, MMC helps clients navigate an increasingly dynamic and complex environment through four market-leading firms. In addition to Marsh, MMC is the parent company of Guy Carpenter, Mercer, and Oliver Wyman. Follow Marsh on Twitter @MarshGlobal; LinkedIn; Facebook; and YouTube, or subscribe to BRINK.

    Disclaimer: Marsh Pty Ltd (ABN 86 004 651 512, AFSL 238983) arrange the insurance and is not the insurer. The information contained herein is based on sources we believe reliable, but we do not guarantee its accuracy. The information contained in this public

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